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Climate Scenario Analysis: TCFD Framework Guide

Climate scenario analysis is a critical component of ASRS disclosure, requiring organisations to assess business resilience under different climate futures. The TCFD framework embedded in ASRS mandates scenario analysis for both transition risks and physical climate impacts.

The approach originated with the Task Force on Climate-related Financial Disclosures (TCFD) and is now embedded in ASRS requirements. Organisations must demonstrate they have considered how climate change could affect their business across different warming pathways.

What is Climate Scenario Analysis?

Climate scenario analysis examines how an organisation’s strategy, business model, and financial position might perform under different climate futures. Unlike forecasting, scenario analysis does not predict a single outcome—it explores a range of plausible futures to test business resilience.

Scenario Analysis Requirements Under ASRS

ASRS requires organisations to disclose:

  1. Scenarios used: Which climate pathways were modelled
  2. Time horizons: Short, medium, and long-term perspectives
  3. Inputs and assumptions: Key parameters and data sources
  4. Resilience assessment: How the business performs under each scenario
  5. Strategic implications: How scenarios inform business strategy

Choosing Climate Scenarios

Organisations should select scenarios that test critical business assumptions:

Climate scenario analysis showing multiple emissions pathways for business strategic planning

NZEO (Net Zero Emissions by 2050) Scenario

A 1.5°C-aligned orderly transition scenario:

  • Global warming: Limited to 1.5°C by 2100
  • Policy trajectory: Rapid decarbonisation, carbon pricing
  • Technology: Fast clean technology adoption
  • Implications: Significant transition risk, limited physical risk

Use this scenario to test business resilience in a world prioritising rapid decarbonisation.

Below 2°C Scenario

A disorderly transition with delayed action:

  • Global warming: Peaks below 2°C
  • Policy trajectory: Delayed but ultimately aggressive policy
  • Technology: Later surge in clean technology
  • Implications: Higher transition risk from delayed action, moderate physical risk

Current Policies Scenario (3-4°C)

A failed transition pathway:

  • Global warming: 3-4°C by 2100
  • Policy trajectory: Limited additional climate action
  • Technology: Continued fossil fuel reliance
  • Implications: Limited transition risk, severe physical risk

Scenario Analysis Process

Step 1: Define Scenario Parameters

For each scenario, define key parameters:

  1. Carbon price trajectory: Price per tonne CO₂-e over time
  2. Technology adoption rates: EV penetration, renewable share, etc.
  3. Policy milestones: Regulatory changes, phase-out dates
  4. Climate variables: Temperature, precipitation, extreme events
  5. Market conditions: Demand shifts, commodity prices

Step 2: Assess Business Model Impacts

For each scenario, evaluate impacts on:

  • Revenue: How does demand change under each scenario?
  • Cost structure: Input costs, energy costs, carbon costs
  • Asset values: Stranded asset risk, impairment potential
  • Capital requirements: Investment needed for transition
  • Competitive position: Market share implications

Step 3: Identify Key Risks and Opportunities

Document how each scenario affects risk exposures:

  • NZEO Scenario: High transition risk (carbon prices, technology disruption), low physical risk
  • Current Policies Scenario: Low transition risk, high physical risk (extreme weather, chronic changes)
  • Below 2°C Scenario: Moderate transition risk (delayed policy creates volatility), moderate physical risk

Step 4: Test Strategic Resilience

Ask critical questions about strategy:

  1. How resilient is the business model under each scenario?
  2. What strategic actions would improve resilience?
  3. What opportunities emerge under each scenario?
  4. What are the decision points where action becomes necessary?
  5. How does current strategy perform across worst-case scenarios?

Conducting Qualitative Scenario Analysis

Many organisations begin with qualitative analysis before progressing to quantitative:

  1. Identify scenario narratives: Describe each scenario’s key features
  2. Map business exposures: Identify critical operations and value chain
  3. Assess directional impacts: High/medium/low impact assessment
  4. Prioritise risks: Materiality-based focus on high-impact areas
  5. Document implications: Summary for disclosure

Conducting Quantitative Scenario Analysis

Quantitative analysis provides financial estimates:

  1. Build scenario parameters: Define quantitative inputs (carbon price, temperatures)
  2. Develop financial models: Apply scenario parameters to financial projections
  3. Estimate impacts: Quantify revenue, cost, and asset value changes
  4. Calculate scenario values: Discounted cash flows under each scenario
  5. Sensitivity analysis: Test key assumptions

Data Sources for Scenario Analysis

Organisations can use multiple data sources for scenario parameters:

  1. IEA World Energy Outlook: Energy transition pathways and technology assumptions
  2. NGFS Scenarios: Network for Greening the Financial System climate scenarios
  3. IPCC Reports: Physical climate science and projections
  4. CSIRO Climate Projections: Australian regional climate data
  5. Industry guidance: Sector-specific scenario frameworks

Documenting Scenario Analysis for Disclosure

ASRS requires transparent documentation of scenario analysis:

  1. Scenarios selected: Rationale for scenario choices
  2. Time horizons: Short-term (2030), medium-term (2040), long-term (2050)
  3. Key assumptions: Carbon prices, technology costs, policy trajectories
  4. Methodology: Approach to analysis (qualitative, quantitative, hybrid)
  5. Resilience finding: Summary of business resilience under each scenario
  6. Strategic implications: Actions taken or planned in response

Common Challenges in Scenario Analysis

  1. Data availability: Limited access to model outputs for specific parameters
  2. Complexity: Difficulty translating global scenarios to business impacts
  3. Uncertainty: Wide range of potential outcomes creates disclosure challenges
  4. Proprietary information: Balancing transparent disclosure with competitive sensitivity
  5. Competency: Developing internal capability for scenario analysis

ESG Solutions Australia Scenario Analysis Support

ESG Solutions Australia provides scenario analysis services:

  • Scenario selection and parameter development
  • Qualitative and quantitative analysis frameworks
  • Financial impact modelling
  • Strategic resilience assessment
  • ASRS disclosure documentation

Contact ESG Solutions Australia for scenario analysis tailored to your organisation.

Key Takeaways

  1. Use at least two scenarios: Test both orderly transition and failed action pathways
  2. Apply multiple time horizons: Short, medium, and long-term perspectives
  3. Assess both risks and opportunities: Scenarios reveal upside potential
  4. Document assumptions: Transparency on parameters and methodology
  5. Inform strategy: Use findings to strengthen business resilience

Explore our Climate Risk Assessment Framework, Physical Climate Risk, and Transition Risk Assessment guides for comprehensive climate risk reporting.